The
Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (IBC)
The Financial sector is facing a
crisis of mounting Non-performing assets and the initiatives taken by the
Government to speed up the process of recovery through DRTs and SARFAESI Act has not effectively addressed the Problem. Gross NPA ratio was 2.7 per cent in 2011, 3.4 per cent in 2012 and
4 per cent in 2013. In 2014 it rose to 4.3 per cent, and further to 5.9 per
cent in 2015 and peaked to 9.2 per cent in 2016. With 470 cases admitted by the National
Company Law Tribunal (NCLT) under the IBC, most experts are keenly watching the
outcome of the first set of 12 big corporate defaulters that lenders have
sought to resolve under the RBI’s directive in June this year. RBI will release
the next 12 default companies list with a deadline to resolve the same before
Dec 2018.
Hence, the Government proposed to
amend the Insolvency and Bankruptcy code to give more teeth to the Bankers.
Highlights
of the Ordinance
Ø Prohibit
the wilful defaulters, disqualified directors, promoters or management of the
defaulting company, and any person who has committed these activities abroad
from submitting a resolution plan for restructuring the debt.
Ø Bars an
insolvency professional from selling the property of a defaulter to any such
person during liquidation.
Key Issues and Analysis
ü Resolution applicant: The
Ordinance amends to define a resolution applicant as a person who submits a
resolution plan after receiving an invite by the insolvency professional to do
so.
ü Eligibility for resolution
applicants: It amends a resolution professional/ Insolvency
and Bankruptcy Board will only invite those resolution applicants to submit a
plan, subject to certain condition.
ü Ineligibility to be a resolution
applicant: The amendment prohibits the following
persons from submitting resolution plan .
(i) he
is an undercharged insolvent (individual unable to repay his debt),
(ii) he
is a wilful defaulter identified by the Reserve Bank of India,
(iii) his
account has been identified as a non-performing asset for more than a year,
(iv)
he has been convicted of an offence punishable
with two ormore years of imprisonment,
(v)
he
has been disqualified as a director under the Companies Act, 2013,
(vi)
he
has been prohibited from trading in securities,
(vii)
he has indulged in undervalued or fraudulent
transactions,
(viii)
he has executed an enforceable guarantee in
favour of a person who is a creditor to a defaulter undergoing a resolution
process,
(ix)
he
is connected to any such person mentioned above (including promoters or people
in control of the defaulting firm during the implementation of the resolution
plan), or
(x)
he
has indulged in any of these activities outside India.
ü Approving resolution plan: The Ordinance amends to state that the
committee will approve this resolution plan by 75% majority subject to any
other conditions specified by the Insolvency and Bankruptcy Board.
ü The Ordinance prohibits the committee
of creditors from approving a resolution plan submitted before the promulgation
of this Ordinance, where the plan has been submitted by a person ineligible to
be a resolution applicant.
ü Liquidation: Ordinance prohibits the insolvency
professional from selling the property to any person who is ineligible to be a
resolution applicant.
ü Penalties: Provision to specify that any person
contravening provisions of the Code for which no penalty has been specified
will be punishable with a fine ranging between one lakh rupees to two crore
rupees.
ü Loan defaulters can not participate in bidding under the insolvency proceedings after paying due interest
and making their bad loan accounts operational,
What is in it for banks?
At
present the bank has to get a buyer and accept a huge haircut to get ride of
the NPA otherwise they will be left with nothing if the company goes into
liquidation. Insolvency &
Bankruptcy Code is likely to play an important role in addressing the non-performing assets (NPA) of the banking sector. The NPA affects the CRAR of
the banks thereby affecting the economic growth due to poor credit off take.
.
1. In terms of Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 the
Code takes precedence over the DRT Act
and SARFAESI Act that during the insolvency resolution process
2. “All
pending proceedings are stayed for a period of 180 days from the date of
admission of the application to initiate such proceeding in terms of Section 12
of the Code”
3. The Code devises
two separate processes for corporate insolvency matters and individual/
un-incorporated bankruptcy matter. Part II of the Code deals with corporate
insolvency mechanism pertaining to companies incorporated under the Companies
Act, 1956 and 2013 and limited liability partnership incorporated under the
Limited Liability Partnership Act, 2008; matters in this regard will be dealt
by the National Company Law Tribunal. Part III deals with the bankruptcy
process for individuals and partnership firms (unincorporated entities) and is
maintainable before the Debt Recovery Tribunal. Both Parts II and III provide a
detailed procedure for declaring a company, LLP, individual, or unincorporated
entity.
4.
Section 14 of the Code the Adjudicating
Authority shall by order declare moratorium for prohibiting all of the
following, namely:, on the insolvency commencement date
(a)
The institution/ continuation of any
pending including execution of judgment or decree..
(b)
Transferring, encumbering, alienating, or disposing
of corporate debtors assets.
(c)
Any action to foreclose, recover, or enforce
any security interest created by the corporate debtor in respect of its
property including SARFAESI act
(d)
The supply of essential goods or services to
the corporate debtor as may be specified shall not be terminated or suspended
or interrupted during moratorium period.
(e)
The provisions shall not apply to such
transactions as may be notified by the Central Government in consultation with
any financial sector regulator.
(f)
The order of moratorium shall have effect from
the date of such order till the completion of the corporate insolvency
resolution process except liquidation process.
(g)
that all pending proceedings are
stayed for a period of 180 days from the date of admission of the application
to initiate such proceeding.
(h)
The second stage that the security held by a
creditor may be affected with respect to a corporate debtor is under the
liquidation order. The Secured creditor will have two option
(a)
A secured creditor can choose to
relinquish his/her security interest and be part of the liquidation process with
preference of distribution; or
(b)
A secured creditor can choose to stay
outside the liquidation process and enforce his/her security interest.
Concerns ahead:
Though the legislature has made extensive efforts to bring
harmony between these laws, it is yet to stand the test of implementation. Some
immediate concerns are as follows:
1. Time-bound insolvency resolution requires the establishment
of several new entities.
2. Interpretation and harmonization of various laws, leading to
delay in insolvency proceedings.
3. Harmonization for the interplay of the different laws will have to be done.
4. Applicability of the CDR and JLF proceedings on the Code will have to be addressed separately.
Though the provisions are yet to be examined by the courts of law, Section 14(1)(c) of the Code clearly provides that during the insolvency resolution process as defined in the Code, the Code takes precedence over the DRT Act and SARFAESI Act.
Conclusion
We trust and hope that the NCLT and Debt Recovery Tribunal under the Code will function effectively and follow the timelines. However, it is our experience that the objectives were not achieved due to the delayed legal process, ignorance of the banks, in case DRT act and SARFAESI act and the same should not happens in IBC also.
BASED on the Governement notifications and selected readings in Internet
